Bad luck, NY-NY slowdown hurting MGM profit

Gary Thompson

Friday, Feb. 27, 1998 | 9:55 a.m.

MGM Grand Inc. said today it expects first-quarter earnings to fall due to a lower table-game win percentage at its flagship property and reduced business at New York-New York, its joint venture with Primadonna Resorts Inc.

Net income for the quarter ending March 31 should be 25 cents to 35 cents a share, down from 51 cents a share in the 1997 first period, MGM Chief Financial Officer James Murren said today.

Wall Street gaming analysts had expected MGM, considered one of the best managed casino operators, to report net about equal to last year's quarter even though business at most Strip resorts is suffering from flat visitor volume and higher room inventories.

The analysts' estimates had ranged from a low of 42 cents a share to a high of 54, with the mean at 50. Today's announcement pushed MGM stock down $1.50, to $35.75, in early trading on the New York Stock Exchange.

MGM and other high-end properties are often able to make up for slack business in some segments with wins from big-bet baccarat players.

But so far this quarter, Murren said, an unusually low table hold percentage, particularly in baccarat, has trimmed about 15 cents per share from historical averages.

"We were very pleased with the baccarat volume over the Chinese New Year, but we simply didn't play lucky," he said.

Dave Ehlers of Las Vegas Investment Advisors said another factor in the lower baccarat hold at MGM could be the apparent success of Rio Hotel & Casino in luring big players away from MGM, Caesars Palace, The Mirage and the Las Vegas Hilton. Rio has apparently been recording big wins so far this quarter from baccarat players, he said.

Murren didn't specify baccarat volume at MGM. But the company has become increasingly conservative about granting credit to high-rollers as a result of concern about the effects of the Asian economic turmoil, which could impact a casino's ability to collect on outstanding markers.

"MGM's slot earnings are up year over year, and occupancy rates there are still over 90 percent," Murren said. Room rates have remained flat at the 5,005-room resort, the city's largest.

At New York-New York, business is down more than 20 percent from last years's first quarter. But the 1997 period's results were unusually high due to the highly anticipated opening of the city's newest themed property, which generated cash-flow margins above 50 percent for several months as visitors flocked to see it.

"New York-New York should still do more than $100 million in cash flow this year," Murren said. "It still has one of the best margins on the Strip right now."

The profit drop at New York-New York is expected to be partially offset by stronger results at MGM Grand Australia, he said.

Today's announcement by MGM follows the Circus Circus Enterprises Inc. report earlier this week that it had posted earnings of 1 cent a share for the three months ended Jan. 31, down from 16 cents a share in the year-ago period. Two one-time charges in the latest quarter cut 11 cents a share from Circus' operating earnings.

Bear Sterns & Co. gaming analyst Jason Ader reduced his ratings on MGM, Circus Circus and Mirage Resorts Inc. last week to "attractive" from "buy," mainly citing transportation bottlenecks that exacerbate overcapacity problems affecting Las Vegas. Ader's downgrade prompted angry reactions from some Las Vegans, but now appear prescient.

"The results in early 1998 obscure the material improvements at the MGM Grand as we transform the property into The City of Entertainment," Chairman Terrence Lanni said. The company is in the midst of an $800 million upgrade and expansion.

"Our casino renovation is substantially complete, and this has led to higher customer satisfaction and demand as evidenced by our strong slot play. This momentum is likely to continue as we open our state-of-the-art conference center in April, our pool and spa complex in June and the MGM Grand Mansion in December," he said.

"Luck factor excluded, the MGM Grand continues to enjoy strong demand," said Alex Yemenidjian, MGM president. "We are progressing with the development of hotel-casino complexes in Detroit and Atlantic City and, along with partners, have been awarded three gaming licenses in the Republic of South Africa. The MGM Grand in Darwin, Australia, is performing above expectations."

Even with the depressed earnings, MGM Grand is still performing better so far than majority owner Kirk Kerkorian's other big entertainment-industry holding, the movie and television production company Metro-Goldwyn-Mayer Inc. It reported a fourth-quarter loss of $82.45 million this week and said it ended 1997 $128 million in the red.